Gold is Antidote for Treasury Trap

Last week Fed Chairman Bernanke raised eyebrows and denied history when he
asserted in front of Congress that gold doesn't qualify as money. Yesterday
he took the unprecedented step of announcing that the Federal Reserve would
keep interest rates near zero for at least the next two years. In very short
order thereafter it required much more of the money that he believes in (U.S.
dollars) to buy the money that he doesn't believe in (gold).

In any event, it was beyond unusual for the Fed to make such an explicit time
commitment on monetary policy. To underscore this fact, three voting members
of the Federal Open Market Committee came out against the policy. Such dissent
within the Fed's ranks has not been seen in decades. But Bernanke's shameless
appeasement of market fears did interrupt, if only for a few hours, the free
fall on Wall Street. Wiser investors, understanding how a more activist Federal
Reserve will destroy the value of the dollar, moved to gold, pushing the metal
up to north of $1,750 per ounce.

The economic forecast contained in the Fed statement was far gloomier than
earlier pronouncements. Bernanke sees continued sluggish growth for the U.S.
economy and subdued inflation. Normally under such conditions gold should be
expected to fall. However, as we have said consistently, these times are far
from normal.

Readers will know already that we believe that the U.S. Treasury market is
a gigantic wealth trap. Even before the Fed's statement, investors seeking
safety from European debt fears and staggering losses and unnerving volatility
in the equities markets had flooded into U.S. Treasury securities. Nevertheless,
this week has thus far seen a stampede into Treasury securities, causing yields
to plummet. One-month Treasuries now yield 0.02 percent, making them no better
than cash; the 5-year yields 0.93 percent, 10-year 2.17 percent and the 30-year
3.56 percent. Assuming a Consumer Price Inflation rate of 3.2 percent, all
new investors in U.S. Treasury securities with a maturity of less than 30 years
are losing 'real' money. In addition, with little prospect of further interest
rate reductions the possibility of capital gains through Treasury investments
are essentially nil.

These negative returns will eventually act as a pressure for funds to drift
away from the bloated bond market into the beaten down equity market. But the
total size of the global bond market is more than twice the size of the global
equities markets, so these fund flows, when they occur, may make an outsize
impact on equity prices.

In addition, the Fed is debasing the U.S. dollar at an increasing rate. Despite
the fact that other nations are following suit to protect their exports, the
dollar is set to fall further. Indeed in criticizing the S&P downgrade
last week, Former Fed Chairman Greenspan said that the Fed need not be concerned
about debt service because it can just "print more money!"

Facing negative real yields, the prospect of further credit rating downgrades
and a falling dollar, investors in U.S. Treasuries are setting themselves up
to be plundered.

On the other hand, despite recession fears, the upward march of gold continues,
with many mainstream investment firms now setting price targets north of $2,000
per ounce. But skepticism remains, with some analysts pointing out that the
price of gold is in "record" territory and is therefore highly speculative.
However today's gold price of $1,760 is still about 30 percent below the inflation
adjusted high set in 1980 when gold struck $850 per ounce. From my perspective,
with a sovereign debt crisis threatening, a currency collapse looming, and
a chronically persistent low interest rate regime, gold looks positively cheap.

John Browne is the Senior Economic Consultant for Euro Pacific
Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament
who served on the Treasury Select Committee, as Chairman of the Conservative
Small Business Committee, and as a close associate of then-Prime Minister Margaret
Thatcher. Among his many notable assignments, John served as a principal advisor
to Mrs. Thatcher's government on issues related to the Soviet Union, and was
the first to convince Thatcher of the growing stature of then Agriculture Minister
Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously
pronounced that Gorbachev was a man the West "could do business with." A graduate
of the Royal Military Academy Sandhurst, Britain's version of West Point and
retired British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military,
John has a significant background, spanning some 37 years, in finance and business.
After graduating from the Harvard Business School, John joined the New York
firm of Morgan Stanley & Co as an investment banker. He has also worked
with such firms as Barclays Bank and Citigroup. During his career he has served
on the boards of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co.
and the former editor of NewsMax Media's Financial Intelligence Report and
Moneynews.com. He holds FINRA series 7 & 63 licenses.